What Have We Learned About ISIS Oil?

September 21, 2016

Matthew Reed is Vice President of Foreign Reports, Inc. and a non-resident fellow at New America and the Payne Institute at the Colorado School of Mines.

A year ago I complained that ISIS “doesn’t publish data or hold conference calls with shareholders.” This is still the case, of course, but important details have come to light in the last year which improve our understanding of the group’s illicit oil trade. What follows are the most interesting revelations I’ve come across since I wrote my two–part primer for The Fuse last October. (More here.) September 24 marks two years since the first strikes against ISIS oil targets in 2014.

Let’s start with how ISIS prices oil: I’ve maintained that ISIS oil was immune to international market forces because the group deals with a captive market. “There’s no proof ISIS pins its price to anything other than what locals will pay for it,” I wrote last year. Now I’m less sure.

ISIS output appears to have been resilient in 2015 and the local market could have consumed virtually all of it, which should have buoyed prices somewhat. Yet ISIS charged less for oil last year than the year before.

ISIS and international prices seem to have fallen in tandem over the same period. ISIS sold its highest quality grades in November 2014 for $50-70/barrel when Brent crude, the international benchmark, averaged $80/barrel. In 2015, Brent averaged $50/barrel overall but dropped as low as $35/barrel in December. The price range for ISIS oil also tumbled into the $25-45/barrel range last year according to a field-by-field breakdown by the Financial Times. ISIS output appears to have been resilient in 2015 and the local market could have consumed virtually all of it, which should have buoyed prices somewhat. Yet ISIS charged less for oil last year than the year before.

Oil prices aside, the cost of fuel has been a major headache for ISIS because they exercise less control over refining than they do oil production. Shortages have quadrupled fuel prices at times. Intel from the May 2015 Abu Sayyaf raid confirmed top ISIS officials faced pressure to cap trader profits on crude oil and retail prices on fuel. But it’s still unclear how closely crude prices track with fuel prices inside ISIS territory. ISIS reportedly gamed these margins to maximize profits, stockpiling goods to sell later at higher prices.

Just how involved is ISIS in daily oil operations? I assumed ISIS relied on skeleton crews of locals led by true believers who had industry experience. But there’s proof ISIS operations are run more like joint ventures with locals and even with companies based outside their territory. To secure and sell fuel, ISIS “acquired” modular refineries inside Syria without ever running them. ISIS supplied the oil and it took a cut of the product and retail profits.

I assumed ISIS relied on skeleton crews of locals led by true believers who had industry experience. But there’s proof ISIS operations are run more like joint ventures with locals and even with companies based outside their territory.

Commercial scale production operations are handled more like proper joint ventures, sometimes employing foreigners who are not on ISIS payroll. According to an FT investigation, Syrian state and private companies pay worker salaries and operational expenses at gas facilities controlled by ISIS. This keeps the power grid humming inside regime strongholds, which have the power plants, and ISIS territory, which has natural gas (90 percent of Syria’s electricity is generated using natural gas).

ISIS enforcers are a fixture of the oil and gas industry nowadays, patrolling facilities, punishing workers and making sure no profits escape ISIS auditors. But ISIS isn’t in total control of operations everywhere even if it has engineers and managers of its own.

How successful has the Tidal Wave II campaign against ISIS oil been? Judging by the pace of strikes this year, 2016 looks to be the worst yet for ISIS oil—and it’s only September. Tidal Wave II is nearly a year old but it is a semi-permanent mission: As long as ISIS has oil, the campaign will not stop. This summer it went into overdrive. (Note: truck strikes are not graphed below because they would distort the chart’s scale.)

The Abu Sayyaf documents showed that ISIS earned $40-50 million a month from oil sales in late 2014/early 2015 when the group produced some 55 thousand b/d. In July, a coalition spokesman told the press that ISIS collected $30 million a month in oil sales before Tidal Wave II. As of mid-2016 he estimated that revenues were down by half to $15 million a month.

In terms of volumes, officials won’t guess how much oil ISIS actually produces. Daily production numbers must vary widely given conditions on the ground. Thus, barrel-per-day estimates are unhelpful if not misleading. In addition, the debate inside the U.S. government appears unresolved. Other departments may not agree with the Pentagon.

That said, the chart above suggests the Pentagon’s optimism is not misplaced.

Without oil, how durable is the so-called Caliphate? U.S. and others are convinced oil never represented more than half of their total revenues. ISIS imposes a range of taxes and fees on all kinds of trade. The group collects a tithe of 2.5% on all capital owned by its “citizens” and it steals supplies from farmers, some of which is surely resold. It charges customs on everything coming to or from ISIS territory (construction materials, cooking oil, livestock, appliances, etc.). The group sells war spoils as well, ranging from ancient artifacts to jewelry to flat-screen TVs.

U.S. and others are convinced oil never represented more than half of their total revenues.

ISIS continues to generate revenue in less direct ways. For example, the group taxes utilities like electricity, which in reality are provided by the Assad regime. As a bonus, joint ventures with ISIS reportedly come with the condition that the group be paid to “protect” facilities they’ve captured. ISIS charges extra to protect Christian workers.

All this is to say that the group has reliable revenue streams besides oil.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.